Drive a Brand-New Honda Civic Today!

You just received a letter from your neighborhood Honda dealership, which says the following:

Drive a brand-new Honda Civic today (MSRP* $23,270.00)!

Two financing options:

1) Loan Option:

- Amount due at signing: $599 (includes taxes, titles, and dealer fees).

- Loan term: 3 years (loan fully repaid by the end of the 3 years).

- Quarterly payments (due at the end of each quarter): $2,047.04.

2) Leasing Option**:

- Amount due at signing: $2,299.00 (includes taxes, titles and dealer fees).

- Leasing term: 3 years

- Monthly payments (due at the beginning of each month): $249.00.

- Option to buy at the end of the 3 years: $14, 660.10.

- Lessee responsible of maintenance, insurance, excessive wear and tear, and 15/mile if vehicle driven over 12,000 miles/year. Payment for any excess mileage is to be paid at the end of each year.

Questions:

Assume that you intend to drive the vehicle for approximately 15,000 miles per year.

1) What is the all-in cost of the loan financing option? (Hint: that cost must be expressed as Effective Annual Rate of interest (EAR)).

2) What is the all-in cost of the leasing option (also expressed as an EAR)?